EEP Amount - Emissions Annex Provision

EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions A Jolly Contrarian owner’s manual™ Resources and navigation Index: Click ᐅ to expand: ISDA Emissions TOC EUA Annex - Premium Emissions Pro tip: for tons of information about EU ETS and EU financial services regulation see Michał Głowacki’s magnificent emissions-euets.com website. Emissions trading documentation ISDA: EU Anatomy • EU Wikitext • EU Nutshell (premium) • UK Anatomy • UK Wikitext (to be merged into EU Anatomy) IETA: IETA Master Agreement • IETA Wikitext • IETA Nutshell (premium) EFET: EFET Allowances Appendix • EFET Allowances Wikitext • EFET Nutshell (premium) Section EEP in a Nutshell™ Use at your own risk, campers! Excess Emissions Penalty/EEP is defined in the Directive. EEP Amount means the amount per Allowance that Receiving Party reasonably determines, in good faith, to be its total losses (not otherwise reflected in its Receiving Party’s Replacement Cost) that result from Delivering Party’s failure to deliver the Shortfall and that relate to: (1) Any Excess Emissions Penalty which Receiving Party incurs under the Scheme; or (2) if “EEP Equivalent” applies, any amount that Receiving Party must pay to a third party to compensate for any such penalty that third party incurs as a result of Delivering Party’s failure to deliver the Shortfall. EEP Risk Period: The specified period of time before the next Reconciliation Deadline. (d)(ii)(3) EEP Amount: If “Excess Emissions Penalty” applies and, following Delivering Party’s failure to deliver, Receiving Party becomes liable for an EEP Amount, it must provide, upon Delivering Party’s request, reasonably satisfactory evidence that: (A) it has incurred an EEP Amount consequent on Delivering Party’s failure; and (B) the extent to which this results from Delivering Party’s failure; and (C) that it could not have used other Allowances to which it had title to reduce its liability for the EEP Amount it claims from Delivering Party. Delivering Party’s obligation to pay any EEP Amount under “Failure to Deliver” is subject to Receiving Party’s having used reasonable endeavours to avoid and mitigate its liability for EEP Amounts and to allocate them pro rata between all its counterparties who have failed to deliver Allowances to it provided, that the onus will be on Delivering Party to show that Receiving Party has failed to do so. view template Full text of Section EEP Excess Emissions Penalty/EEP: Has the meaning given to it in the Directive. EEP Amount: Means an amount (expressed as an amount per Allowance) that Receiving Party determines, acting in good faith and using commercially reasonable procedures, to be its total losses and costs which result from Delivering Party’s failure to deliver the Shortfall to the extent that those losses and costs are not reflected elsewhere in the definition of Receiving Party’s Replacement Cost and to the extent that those losses and costs relate to: (1) any Excess Emission Penalty which Receiving Party must pay to the Relevant Authority in accordance with the terms of the Scheme; and/or (2) if “EEP Equivalent” is specified to be applicable in the Annex to this Part [7] or the Confirmation for the relevant EU Emissions Allowance Transaction, any amount which Receiving Party must pay to a third party in respect of any such penalty payable to any other party (including a Relevant Authority) by that third party as a result of Delivering Party’s failure to deliver the Shortfall. EEP Non-delivery: Has the meaning given to such term in Part (d)(xi) (Failure to Deliver (Alternative Method) – EEP Applicable). EEP Risk Period: Means, in respect of an EU Emissions Allowance Transaction and any Delivery Date, a period of time prior to the first succeeding Reconciliation Deadline, as specified in the related Confirmation. (d)(ii)(3) EEP Amount: Subject to the paragraph below, if “Excess Emissions Penalty” is specified to be applicable in the Annex to this Part [7] or the Confirmation for the relevant EU Emissions Allowance Transaction and as a result of Delivering Party’s failure to deliver the Allowances to be Delivered (in whole or in part) on the Delivery Date Receiving Party becomes liable to pay any EEP Amount, then Receiving Party shall provide to Delivering Party, upon its reasonable request, evidence to the reasonable satisfaction of Delivering Party: (A) that Receiving Party has incurred an EEP Amount consequent on Delivering Party’s failure to deliver the Allowances to be Delivered (in whole or in part); and (B) the extent to which the requirement for Receiving Party to pay any EEP Amount results from Delivering Party’s failure to make such delivery; and (C) that Receiving Party could not have used Allowances to which it had title in any Holding Account(s) in any Registry in order to avoid or reduce its liability to pay any EEP Amount which it claims from Delivering Party as part of Receiving Party’s Replacement Cost. Delivering Party’s obligation to pay any EEP Amount in accordance with “Failure to Deliver” under Part [7] of the Schedule to this Agreement is subject to Receiving Party’s overriding obligation to use its reasonable endeavours to avoid becoming liable for such EEP Amount or, when liable, to mitigate the payment obligation in relation to such EEP Amount and to allocate any such EEP Amount pro rata between all counterparties of Receiving Party that have failed to deliver Allowances to Receiving Party provided, however, that where Receiving Party confirms it has been unable to avoid becoming liable for any EEP Amount, it shall be for Delivering Party to show that it has been as a result of Receiving Party failing to use its reasonable endeavours to do so. view template Comparison See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. 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Content and comparisons

The definition of Excess Emissions Penalty is more or less the same in all three emissions trading documentation regimes. Compare:
ISDA: Excess Emissions Penalty
IETA: Excess Emissions Penalty
EFET: Excess Emissions Penalty
Seeing as it is quite a fundamental part of the economic risk of Allowance trading, we should not be surprised to find that all three versions have a concept of EEP or Excess Emissions Penalty, nor that, per their Myers-Briggs personality types, ISDA has gone for quite unnecessary optionality, IETA has sort of followed suit, and EFET has gone for none, but laborious drafting of alternatives anyway. Hey ho.

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Summary

ISDA defines itself up the wazoo, with EEP, EEP Equivalent, EEP Amount, EEP Non-delivery, EEP Payment, EEP Risk Period and Indemnifiable EEP — of course they did, didn’t they — whereas IETA is a relatively spartan Excess Emissions Penalty (and no EEP Equivalent — it just defines it in EEA Amount as “if this sub-paragraph (b) is specified in Schedule 2 (Elections) as applying”) and EEP Status, while EFET just has EEP and EEP Equivalent, but nothing else.

EEP Amount is pretty much the same between ISDA and IETA. EFET goes off on one.

What is is all about

Well, the basic point of an Emissions Trading Scheme is to require emitters to surrender Allowance credits to atone for their pollution, on main of being whacked with financial penalties for failing to do so on time. These are the Excess Emissions Penalties, so this is what it is all about, compadres.

Relevant for operators and those settling contracts with them, who have to worry about Reconciliation Deadlines and such messy practicalities.

An “Excess Emissions Penalty” is a penalty payment levied under the EU ETS on a end-user who is a Receiving Party under an Allowance Transaction, and who missed the deadline for surrendering Allowances as a direct result of a failure by a Delivering Party to transfer Allowances when due under that Allowances Transaction. Only likely to be relevant if (i) your counterparty is some kind of power station or carbon monster and (ii) the Transaction is due to settle just before April 30th in any year, when Allowances must be submitted.

An EEP Equivalent is an amount for which a Receiving Party becomes liable to a third party end user under a different Allowance Transaction — along the contractual chain, as it were — which is nonetheless occasioned by Delivering Party failing to settle a transfer of Allowances under this one.

Obe case is an actual penalty, the other one a delta-one derivative of a penalty, and both amount to the same thing. IETA and ISDA recognise this by wrapping “EEP Equivalent” into the concept of EEP Amount (optionally, at any rate, although it is hard to imagine when you wouldn’t apply the equivalent).

You would like to think EFET’s Carbon Squad would have done likewise, or at least come up with a better term than “EEP or EEP Equivalent” — which appears a mouthwatering 48 times in the document — to define it, especially since there doesn’t seem to be any optionality under the EFET.

At least, we suppose, they didn’t say, “EEP or EEP Equivalent as the case may, for the time being and from time to time, without limitation, be”.

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General discussion

The Excess Emissions Penalty is made flesh in Article 16 of the EU ETS directive. The penalty is fixed at EUR 100, and does not release the transgressor from the obligation to surrender the Allowancess in question, though the obligation rolls over to the next {euaprov|Reconciliation Deadline}} period a year hence. This folds into the way damages for failure to deliver Allowances are calculated: see Clause 12 (IETA) Clause 8 (EFET) clause (d)(ii) (ISDA).

Article 16: Penalties

1. Member States shall lay down the rules on penalties applicable to infringements of the national provisions adopted pursuant to this Directive and shall take all measures necessary to ensure that such rules are implemented. The penalties provided for must be effective, proportionate and dissuasive. Member States shall notify these provisions to the Commission by 31 December 2003 at the latest, and shall notify it without delay of any subsequent amendment affecting them.

2. Member States shall ensure publication of the names of operators who are in breach of requirements to surrender sufficient allowances under Article 12(3).

3. Member States shall ensure that any operator who does not surrender sufficient allowances by 30 April of each year to cover its emissions during the preceding year shall be held liable for the payment of an excess emissions penalty. The excess emissions penalty shall be EUR 100 for each tonne of carbon dioxide equivalent emitted by that installation for which the operator has not surrendered allowances. Payment of the excess emissions penalty shall not release the operator from the obligation to surrender an amount of allowances equal to those excess emissions when surrendering allowances in relation to the following calendar year.

4. During the three-year period beginning 1 January 2005, Member States shall apply a lower excess emissions penalty of EUR 40 for each tonne of carbon dioxide equivalent emitted by that installation for which the operator has not surrendered allowances. Payment of the excess emissions penalty shall not release the operator from the obligation to surrender an amount of allowances equal to those excess emissions when surrendering allowances in relation to the following calendar year.

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See also

• Failure to Deliver
• Reconciliation Deadline
• EEP Amount — ISDA EU Emissions Annex
• EEP Amount — IETA Master Agreement
• EEP and EEP Equivalent — EFET Allowances Appendix

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